FACTORS AFFECTING PRICE ELASTICITY OF DEMAND

DETERMINANTS / FACTORS AFFECTING PRICE ELASTICITY OF DEMAND

The elasticity of demand is different for different goods. The various factors which affect the elasticity of demand of a commodity are:

1.      Availability of Substitutes

The demand for a commodity with more substitutes will be more elastic. For example, coffee and tea may be considered as close substitutes, a rise in price of coffee encourages buyers to buy tea and vice-versa. Thus, availability of close substitutes makes the demand sensitive to change in the prices.

On the other hand, commodities with few or no substitutes like salt, milk, sugar, etc., the demand for it would be inelastic.

2.      Nature of the Commodity

The demand for necessities like food items, medicines, etc. its demand is generally inelastic as it is essential for existence and the demand for comforts or luxuries goods like car, AC, TV, refrigerator, etc., its demand is generally elastic as consumer can postpone its consumption.

  

3.      Proportion of the Income Spent

Smaller is the proportion of income spent on a commodity, the smaller will be the elasticity of demand and vice versa. For example, the demand for soap, salt, matches, etc. is highly inelastic since consumer spends a very small proportion of income on them. And demand for goods like cloths, TV, furniture, etc. is likely to be elastic since the consumer spends a large fraction of his income on this goods.

4.      The Number of Uses of a Commodity

If the commodity has several uses, then its demand will be elastic. On the other hand, a commodity with no or few alternative uses has less elastic demand. Example: Electricity.

5.      Time Period

Demand is generally inelastic in the short period because consumers find it difficult to change and adjust their taste, preferences and habits, and also substitutes may not be available in the short-run. However, demand is more elastic in long run as it is comparatively easier to shift to other substitutes, and consumer may adjust their preferences and consumption pattern.

6.      Postponement of Consumption

Commodities such as biscuits, soft drinks, etc. whose demand is not urgent, have highly elastic demand as their consumption can be postponed in case of an increase in their prices. However, commodities with urgent demand like medicines and food have inelastic demand because of their immediate requirement.

7.      Price Range / Level of Price

Demand for costly goods has highly elastic demand as it is very sensitive to changes in their prices. However, demand for inexpensive goods is inelastic as changes in prices of such goods do not change their demand by a considerate amount.

8.      Habits of the Consumer

Commodities, which have become habitual necessities for the consumers have less elastic demand. Example: Alcohol, tobacco, cigarettes, etc.